Changes to the Taxation of non-UK Domiciled Individuals

10/08/2024 - 8 minutes read

Changes to the taxation of non-UK domiciled individuals were announced by the new Chancellor in the Economic statement on 29 July 2024.

Changes to the taxation of non-UK domiciled individuals will result in the removal of preferential tax treatment based on domicile status for all new foreign income and gains (FIG) that arise from 6 April 2025.

New residence-based regime for foreign income and gains

To replace the remittance basis taxation of non-UK domiciled individuals, the government will introduce an internationally competitive residence-based regime, providing 100% relief on FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival.

From 6 April 2025, the protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year FIG regime.

The government intends to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, to modernise the rules and ensure they are fit for purpose.

The intention for this review will be to remove ambiguity and uncertainty in the legislation, make the rules simpler to apply in practice and ensure these anti-avoidance provisions are effective. Further details on the review will be provided in due course. It is not anticipated that this review will result in any changes before the start of the 2026/27 tax year.

A form of Overseas Workday Relief (OWR) will be retained. Officials will engage with stakeholders on the design principles for this tax relief and further details will be confirmed at the Budget.

Changes to the Taxation of non-UK Domiciled Individuals

Changes to the Taxation of non-UK Domiciled Individuals

Transitional arrangements for affected non-UK domiciled individuals

The policy announced by the previous government, providing a 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime, will not be introduced.

UK resident individuals who are ineligible for the 4-year FIG regime (or who choose not to make a claim for a tax year) will be subject to Capital Gains Tax (CGT) on foreign gains in the normal way.

Transitionally, for CGT purposes, current and past remittance basis users will be able to rebase foreign capital assets they hold to their value at the rebasing date when they dispose of them. The government is considering the appropriate rebasing date and will set this out at the Budget.

Any FIG that arose before 6 April 2025, while an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK, as is the case under the current rules. This includes remittances of pre-6 April 2025 FIG for those who are eligible for the new 4-year FIG regime.

A new Temporary Repatriation Facility (TRF) will be available for individuals who have been taxed on the remittance basis. Individuals that have previously claimed the remittance basis will be able to remit FIG that arose prior to 6 April 2025 and pay a reduced tax rate on the remittance for a limited time period after the remittance basis has ended.

The rate and the length of time that the TRF will be available will be set to make use as attractive as possible.

The government is also exploring ways to expand the scope of the TRF, including to stockpiled income and gains within overseas structures, and will confirm further details at the Budget.

New residence-based regime for inheritance tax

Inheritance tax (IHT) is currently a domicile-based system. The government intends to replace this with a new residence-based system from 6 April 2025.This will affect the scope of property brought into UK IHT for individuals and trusts.

The government envisages that the basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with provision to keep a person in scope for 10 years after leaving the UK.

The government will engage further with stakeholders on the operation of the new test, so that any refinements can be considered fully. IHT charges arising on deaths occurring before 6 April 2025 will be unaffected by these changes and will be charged according to the existing rules.

The government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT. The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here.

The government recognises that trusts will already have been established and structured to reflect the current rules, so is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.

Confirmation of these new rules and their detailed application, including transitional arrangements for affected settlors, will be published at Budget, following external engagement.

The government will not carry out a formal policy consultation on moving to a residence-based system for IHT. Instead, it will review stakeholder feedback provided following the Spring Budget and officials will carry out further external engagement over the summer on IHT policy design.

Further details on the separate engagement sessions on IHT and OWR, will be published on gov.uk in due course.

How can MCL Accountants help you with your queries on changes to the taxation of non-UK domiciled individuals?

Contact MCL Accountants on 01702 593 029 if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC